July 15 (Bloomberg) -- U.S. states “can ill afford” a
federal government default if talks in Washington fail to raise
the nation’s debt ceiling, the chair of the National Governors
Association said.

States “are in a fragile state of recovery” and the debt-ceiling debate is undermining consumer and business confidence,
Washington Governor Christine Gregoire said today at a
conference attended by 32 state leaders in Salt Lake City, Utah.

“It’s time to put this issue behind us and get on with the
issue confronting every American, which is, ‘Do I have a job and
will I have a job tomorrow,’” Gregoire, a second-term Democrat,
said in a press conference.

President Barack Obama and Republicans in Congress are
attempting to work out an agreement to boost the legal debt
ceiling. The Treasury Department has said the U.S. will reach
the limit of its borrowing authority on Aug. 2.

Unless the debt limit is raised, the Treasury would have to
cut about $134 billion in spending during August, according to a
report by the Washington-based Bipartisan Policy Center. The
cuts might imperil funds flowing to the states for such things
as transportation and Medicaid, the joint federal-state health
program for the poor.

Unsettled financial markets could also push up borrowing
costs for municipalities should Treasury bonds, which set the
baseline for other securities, tumble.

‘So Much Uncertainty’

“There is so much uncertainty,” Delaware Governor Jack
Markell, a Democrat, said in an interview with Megan Hughes on
Bloomberg Television. “If things fall apart and it leads to a
significant interest-rate increase, that would be a problem.”

“If it jacks up the interest rate we have to pay if we
sell additional bonds, that’s a problem,” he said.

Should the U.S. government loses its top Aaa credit rating
following a default, at least 7,000 top-rated municipal credits
would have their ratings cut, Moody’s Investors Service said in
a report this week. Top-rated securities with no direct links to
the national government would also be reviewed for similar
action, the New York-based company said.

An “automatic” downgrade affecting $130 billion in
municipal debt directly linked to the U.S. would follow any
reduction in the federal level, Moody’s said.

Moody’s gives 15 states an Aaa grade, along with 440 local
governments, 100 state housing-bond programs, 43 higher-education and nonprofit institutions, a like number of state
revolving-fund bond programs, and the Tennessee Valley Authority
and the Bonneville Power Administration.